Europe’s growing divide

Commentary: Will the weight of its contradictions split the EU?

LONDON (MarketWatch) — A number of people have speculated in recent years whether the euro area might eventually break up into two under the weight of its own contradictions.

I voiced the opinion 2010 that this might be an option. Hans-Olaf Henkel, the persuasive former president of the German Industry Federation, formerly a wholehearted supporter of the euro, brought out a best-selling book in Germany advocating a schism between a German-led North and a French-led South. Read Marsh’s 2010 column about the impending euro split.

Euro supporters — and there are still very many — have tended to pour cold water on such suggestions, although the vigor of their rejection has declined with each painful twist of the monetary union saga. Witness the statement of a leading, highly-respected French monetary figure in Paris last week: “If I had access to money I would be hesitant to tell myself or my clients that the disintegration of the euro is a basic scenario.” Hardly a ringing endorsement.

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Of course, the technical and political complexities of such a split are awesome, but European history, unfortunately, is littered with seemingly improbable upsets. Fragmentation of European economies between a better-performing North and a recession- and debt-hit South is a fact of life. At the very center of the problem is the worsening competitiveness gap between France and Germany. The perceptions of continental drift have worsened since President François Hollande’s election victory in May propelled to power a leader with very different views from Chancellor Angela Merkel on how to put Europe to rights.

Those leaning towards a north-south split seem to be gaining in strength on the other side of the Atlantic. German-born former U.S. secretary of state Henry Kissinger has traditionally been one of the stoutest advocates of European unity, in the best tradition of German Christian Democrat stalwarts such as Helmut Kohl, who as chancellor in 1982 to 1998 presided over German unification.

However, Kissinger, 89, in an intriguing interview on Friday with German business daily Handelsblatt, let down his guard when he spoke of the possibility that a “creative statesman” could generate “a system in which political unity could co-exist with two different economic approaches.’ Kissinger insisted that his remarks should not be “overinterpreted” but asked whether a two-speed Europe might become reality in view of highly diverging economic and social patterns in Europe.

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“At what point should one consider forming a smaller, more homogenous economic association [which could be] part of a bigger political union in which not every member state would go forward at the same speed.”

That is what seems to be happening. One of the most startling signals of European division is that 14 million people are out of work in Spain, Portugal, Italy, Greece and France, against only 4 million in Germany and the more successful northern states. The European Commission is predicting that German GDP will grow by 0.8% next year, the same as this year, whereas it will fall by 1.4% in Spain, 1% in Portugal, 0.5% in Italy and 4.2% in Greece, marking Athens’ sixth consecutive year of economic contraction.

The combined effect of the shrinking numerator of economic output and the rising denominator of debt means that, in nearly all cases, European countries’ debt-to-GDP ratios will rise further next year — threatening a vicious circle of more debt write-downs and a steadily shrinking ability to raise funds from capital markets or even ultimately from governments.

Not a pretty sight to be beholden by Kissinger in his 90th year — and an area where we will no doubt be treated to new musings by the Grand Old American as the euro imbroglio continues to provoke a constant cavalcade of ups and downs.

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